Macroeconomics Budget Revision Notes

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Questions and Answers

What is the primary deficit calculated as?

Fiscal deficit plus interest payments

Total government borrowings

Government revenue minus total expenditure

Fiscal deficit minus interest payments (correct)

Which of the following is NOT an implication of a primary deficit?

It reflects government borrowings for non-interest costs

It stifles future advancement

It decreases government obligations (correct)

It increases reliance on foreign resources

Which measure would aid in reducing the government's deficit?

Increasing interest payments

Implementing government subsidies

Enhancing tax-based revenues (correct)

Reducing the tax base

How does fiscal policy primarily influence a country's economy?

Through planned expenditure and tax rate changes Signup and view all the answers

What does a broader tax base help to achieve?

Reduce the government's deficit Signup and view all the answers

Which of the following correctly aligns with Keynesian economics?

It allows for adjustments in expenditure and tax rates Signup and view all the answers

Debt is best defined as:

Money borrowed from lenders by a borrower Signup and view all the answers

What does macroeconomics primarily focus on?

Aggregate economic processes Signup and view all the answers

What is the value of MPC given that an initial investment increase results in a total income increase of Rs 5000?

0.8 Signup and view all the answers

What does the equation AD = C + I + G represent in a three sector economy?

Total aggregate demand in a closed economy Signup and view all the answers

What characterizes ex-ante aggregate demand?

It refers to aggregate demand that has already been planned Signup and view all the answers

What is the total amount of consumption given the total increase in income is Rs 5000 and Rs 4000 is spent?

Rs 4000 Signup and view all the answers

Which equation represents aggregate supply (AS)?

AS = C + S Signup and view all the answers

What does social welfare encompass?

The sum of economic and non-economic well-being Signup and view all the answers

What does excess demand indicate in an economy?

Aggregate demand exceeds aggregate supply Signup and view all the answers

Which of the following is NOT a reason for increased excess demand?

Decrease in credit availability Signup and view all the answers

What does autonomous consumption refer to?

Consumption that is unaffected by income Signup and view all the answers

Which factor is NOT included in GDP but affects well-being?

Externalities Signup and view all the answers

How is average propensity to consume (APC) defined?

Consumption per unit of income Signup and view all the answers

If the total savings from the income increase of Rs 5000 is Rs 1000, how much is saved?

Rs 500 Signup and view all the answers

What is the formula for calculating the value of output?

Quantity of output x Price Signup and view all the answers

Which of the following is an aspect that can misrepresent economic welfare?

Inflation creating an impression of decline Signup and view all the answers

How is the investment multiplier (K) mathematically defined?

K = Y / I Signup and view all the answers

Which statement is true about induced consumption?

It demonstrates a dependence on household income Signup and view all the answers

If the average propensity to consume (APC) is greater than 1, what does it indicate?

Consumption exceeds national income Signup and view all the answers

What does intermediate consumption represent?

The value of non-factor inputs used in production Signup and view all the answers

In the given scenario, how much does the initial investment increase?

Rs 1000 Signup and view all the answers

What is the primary determinant of consumption demand?

Household income Signup and view all the answers

What is a limitation of using per capita real GDP as an indicator of economic welfare?

It overlooks significant non-market transactions Signup and view all the answers

Which method of calculating national income is focused on production activities?

Product/Value Added Method Signup and view all the answers

How is change in stock calculated?

Stock = Closing Stock - Opening Stock Signup and view all the answers

What does AD stand for in economic terms?

Aggregate Demand Signup and view all the answers

When AD > AS occurs, what is the expected response from producers?

Increase production levels Signup and view all the answers

In the equation AD = C + I, what does 'I' represent?

Investments Signup and view all the answers

What situation does AD < AS indicate in an economy?

Excess supply Signup and view all the answers

What should producers do when they experience a situation where anticipated output remains unsold?

Cut production levels Signup and view all the answers

In the context of the AD-AS approach, what is the significance of point K?

Where equilibrium is established Signup and view all the answers

What does the term 'self-contained investment' imply?

Investment is independent of income levels Signup and view all the answers

What happens to savings when income decreases due to reduced output?

Savings decrease Signup and view all the answers

What does GVA at basic prices exclude?

Production subsidies Signup and view all the answers

How is GVA at factor cost calculated?

GVA at basic prices - Net production taxes Signup and view all the answers

What is a key characteristic of Real GDP?

Adjusts for inflation Signup and view all the answers

Which of the following statements about Nominal GDP is true?

It reflects the current year's prices of all produced goods Signup and view all the answers

What is the formula to convert nominal GDP into Real GDP?

Real GDP = (Nominal GDP / Price index) x 100 Signup and view all the answers

What does the GDP Deflator represent?

The ratio of nominal GDP to real GDP Signup and view all the answers

In the context of GDP and welfare, how is welfare defined?

People's material well-being Signup and view all the answers

Which of the following is NOT a characteristic of Nominal GDP?

Is adjusted for inflation Signup and view all the answers

Signup and view all the answers

Study Notes

Macroeconomics Revision Notes

Budget: A year-long financial report outlining future revenue and expenditure projections. It details a country's income and expenses.

Main Budget Objectives

Resource reallocation
Income and wealth redistribution
Public sector management
Economic stability
Economic development
Employment creation

Budget Components

Revenue Budget: Includes government revenue receipts and expenditures met by those receipts.
Capital Budget: Includes capital receipts and payments, encompassing transactions from the Public Account. Also includes assets and liabilities.

Budget Receipts

Revenue Receipts: Receipts that don't lead to a decrease in assets or liabilities. These are further categorized by source.
- Direct Tax: Paid directly to the government by the taxpayer, who bears payment responsibility. Examples include income tax.
- Indirect Tax: Paid ultimately by the consumer of products and services. Examples include sales tax.
- Non-tax Receipt: Include interest, grants, fines, and penalties.

Budget Expenditure

Revenue Expenditure: Current or short-term costs of running daily operations, fully charged in the year incurred. Can be recurring or non-recurring.
Capital Expenditure: One-time investments in expanding sectors (e.g., infrastructure, machinery) typically for long-term use by the government.

Budget Deficit

The difference between total spending and revenue excluding borrowings.

Revenue Deficit

The difference between total revenue receipts and total revenue expenditure. A large deficit suggests government spending is exceeding revenue collection.

Fiscal Deficit

When the total expenditure of the government exceeds its total revenue including borrowing.

Primary Deficit

Fiscal deficit less interest payments on previous loans.

Implications of Revenue Deficit

Indicates budgetary indiscipline
Indicates dis-saving of the government
Shows government's excessive expenditures
Lowers assets due to disinvestment

Implications of Fiscal Deficit

Debt trap
Inflationary pressures
Stifles future advancement
Increased reliance on foreign resources
Raises government obligations

Implications of Primary Deficit

Indicates how much of government borrowing is used to cover costs other than interest payments

Measures to Correct Deficits

Government subsidy cuts can reduce deficits.
Increase emphasis on tax-based revenue collection.
Reduce tax evasion.
Borrowing from domestic or international sources.
Broaden tax base.

Macroeconomics (Other Chapters)

Macroeconomics: The branch of economics studying the economy as a whole, encompassing concepts such as inflation, unemployment, and economic growth.
Economic Agents: Individuals or institutions making economic decisions (e.g., individuals, governments, businesses.)
Great Depression: A severe global economic downturn that began in 1929, impacting several countries. -Triggered by stock market crash and led to sharp decreases in employment, output and income.
GDP: Gross Domestic Product, the total value of all final goods and services produced within a country over a specific time period (e.g., a year).
Goods: Physical objects, services, etc, produced to satisfy wants and needs
- Consumption goods: Consumer goods, e.g. television, clothes
- Capital Goods: Items used to produce other goods, e.g. machinery, factory buildings
Investment: An asset or object purchased to generate income or increase in value.
Depreciation: The loss in value of a tangible asset over its useful life.
Capital Formation: The gradual increase in the stock of capital over time (e.g., building new factories).
Factor Cost: The revenue generated by production factors (e.g., labor, capital) in exchange for their services.
Market Price: The price at which a good is sold in the market.Includes production costs, taxes and subsidies..
Transfer Payments: Payments received or made without an exchange of goods or services (e.g., government welfare payments).
Stock Variables: Measured at a specific point in time. (e.g., Wealth)
Flow Variables: Measured over a period of time. (e.g., Income)
Leakage: When money is lost from the economy (e.g. savings, taxes, imports)
Injection: When money is added to the economy (e.g., investment, government spending, exports)

Money and Banking

Money: The most common medium of exchange in an economy.
Barter Exchange: Trading goods or services directly without using money..
Functions of Money:
- Primary functions: Medium of exchange and unit of account.
- Secondary functions: Store of value and standard of deferred payment..
Fiat Money: Money that has value because the government has declared it to be legal tender.
Money Supply: The amount of money in circulation at any given time.
Measures of Money Supply: Different measures, such as M1, M2, M3, and M4, track different aspects of the money supply..
Commercial Banks: Financial institutions accepting deposits and making loans.
Central Bank: The main bank of a nation, responsible for monetary policy and supervising commercial banks.
Money Creation by Banks: The ability of commercial banks to create new money by extending loans..
Reserve Deposit Ratio ( RDR): The portion of deposits that banks are required to keep as reserves.
Cash Reserve Ratio (CRR): Percentage of deposits that banks must keep in the form of cash reserves with central bank.
Statutory Liquidity Ratio (SLR): Specifies the minimum proportion of net demand and time obligations that commercial banks must retain with themselves.
Open Market Operations (OMO): Central bank activities of buying or selling government securities to influence the money supply

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Description

Dive into the essential components and objectives of budgets in macroeconomics. This quiz covers various aspects including revenue and capital budgets, as well as the types of budget receipts. Test your understanding of how these elements contribute to economic stability and development.